Texas Elite Advisory - Clients' and Friends' Newsletter - February 2017
Market Update
(all values as of 09.30.2020)

Stock Indices:

Dow Jones 27,781
S&P 500 3,363
Nasdaq 11,167

Bond Sector Yields:

2 Yr Treasury 0.13%
10 Yr Treasury 0.69%
10 Yr Municipal 0.84%
High Yield 5.77%

YTD Market Returns:

Dow Jones -2.65%
S&P 500 4.09%
Nasdaq 24.46%
MSCI-EAFE -8.92%
MSCI-Europe -10.53%
MSCI-Pacific -6.19%
MSCI-Emg Mkt -2.93%
 
US Agg Bond 6.79%
US Corp Bond 6.64%
US Gov’t Bond 8.04%

Commodity Prices:

Gold 1,892
Silver 23.37
Oil (WTI) 39.88

Currencies:

Dollar / Euro 1.17
Dollar / Pound 1.28
Yen / Dollar 105.60
Dollar / Canadian 0.74

Macro Overview

A change in sentiment was prevalent throughout the markets as new rules and regulatory reversals began to take effect. Volatility rose as markets tried to discern President Trump’s policies.

Equity markets propelled to new highs in January as optimism fueled U.S. equities, sending the Dow Jones Industrial Average to a new milestone level of 20,000. The S&P 500 Index and the Nasdaq Composite Index also reached new highs during the month.

Executive orders undertaken by the President were able to derail several rules signed into law by the Obama administration, yet fiscal policy initiatives proposed by President Trump such as tax cuts and tax reform need Congressional approval. The Congressional Review Act (CRA) will allow the Republican led Congress to reverse a number of regulations enacted by the prior administration.

Fiscal concepts presented by the President may encourage companies with ample cash to invest in capital rather than buying back their own stock or issuing heftier dividend payouts. A lagging key component of GDP has been capital spending.

The National Federation of Independent Business released their survey of small business optimism, which soared 7.5% to its fifth highest level in over 40 years of survey results. (Sources: Fed, NFIB, Dow Jones, S&P)

Increase In Bond Yields Stall – Fixed Income Update

Demand for bonds increased towards the end of January following a pull back in equities. The rise in bond demand brought bond yields lower from their elevated levels earlier in the month. An inverse relationship exists with bonds, as bond prices rise, bond yields fall.

Analysts believe that the anticipation of increased infrastructure spending and government borrowing might lead to a significant boost in Treasury borrowing, which could push up borrowing costs for the government in the form of higher interest rates.

Remarks by Fed Chairperson Janet Yellen signaled that the Fed intends to increase rates throughout 2017, contingent on economic and employment growth. Janet Yellen’s term as Fed chief ends in June 2018, allowing the President to appoint a new Fed boss then. (Sources: Federal Reserve, Bloomberg)

ERVS – Price Timing vs. Market Timing

We have remained heavily weighted in cash since before the Presidential election in our core strategy.   This is very unusual for us, and less a response to  macroeconomics and market volatility than to the high equity prices.  The Elite Relative Value Strategy (EVRS) makes use of our proprietary internally calculated relative value price model applied to a small target universe of common equities.  Said simply, we buy good companies when the the price is low and sell when it is high.  For the most part, we are unconcerned with the vicissitudes of the market.   Those interested in learning more about our strategy should request our 17 page Owner’s Manual.

 
Homes Become Less Affordable

Homes Become Less Affordable As Rates Move Up – Housing Market

The recent rise in rates has led to a drop in the Housing Affordability Index as tracked by the Federal Reserve. Both existing and new home sales slowed towards the end of 2016 as a rise in rates pushed mortgage rates higher. Rising interest rates tend to increase the cost factor when purchasing a home with a mortgage loan.

The two most feasible methods of raising the Affordability Index is by either having an increase in wages or by having a drop in housing prices. Historically, home prices tend to fall much faster than wages rise, since pay raises take time.

The Housing Affordability Index is negatively correlated to the 10-year Treasury Bond yield, meaning that as yields rise, the Affordability Index declines. (Source: St Louis Federal Reserve Bank)

International Markets React – International Update

Markets throughout the world reacted to the various orders and actions executed by President Trump with caution, meaning that foreign companies and governments need time to see how such proposals would unfold.

The dollar’s strength continues to weigh on emerging markets that essentially compete with the dollar in attracting capital.

The euro staged a minor comeback at the end of January, as Brexit became more of a challenge when the highest court in the U.K. ruled that Prime Minister Theresa May must seek a parliamentary vote in order to continue on with exiting the EU. Britain’s expected exit from the EU has devalued the British pound since the passage of the vote to exit the EU.

Asian markets were in a quandary as the U.S. withdrew from the Trans-Pacific Partnership (TPP), a free trade agreement among 12 countries (including the U.S.) signed in 2016. Comprised mostly of Asian countries, the TPP excludes China and consists of countries bordering the Pacific Ocean.

Sources: EuroStat, Bloomberg

Understanding Investments – FREE ebook

Want to become a better investor?  Our advice is to learn all you can.  Toward this end our Chief Portfolio Manager, Daniel Dower,  has made his book “Understanding Investments a Few Minutes at a Time” available for free in ebook form.  To register for Daniel’s book just click on the link below:

Click here to register for Daniel’s Book

 
Why GDP Growth Was Lackluster For 8 Years

 

Why GDP Growth Was Lackluster For 8 Years – Domestic Economy

A key component of GDP growth has been lagging for years, as a lack of incentives for companies to invest in capital has been an issue. Many believe that economic growth since the financial crisis in 2008/2009 has been driven primarily by the monetary stimulus efforts enacted by the Federal Reserve. The Quantitative Easing programs, aka Q.E. 1 & Q.E. 2, provided tremendous liquidity for nearly eight years as the Fed bought debt and placed it on its balance sheet.

The problem is that what the Fed did was considered a form of “artificial stimulus”. Rather than investing in capital equipment for long-term economic growth, companies instead borrowed money at historically low rates via issuing debt, then bought back a portion of their stock. This in turn helped send stock prices higher without any tangible economic growth strategy in place. As this transpired, GDP growth lagged and companies basically became complacent with anemic rates of growth.

Source: BLS

Optimize your 401k

More than 61 million people participate in employer-sponsored retirement programs like 401(k), 403(b), 457 and Thrift plans. But many investors simply do not feel qualified or comfortable selecting and managing investments within their employer-sponsored retirement accounts. You, like many others, may need help choosing how to invest 401k from among the investments your employer’s plan offers and allocating those choices appropriately. Unless you work for a retirement investment firm or a very large company, chances are your options for plan investments are limited. Properly managing your employer-sponsored retirement account may have a profound impact on your retirement goals. Regardless of whom you work for if you are invested in a company plan Our 401K planning partner can provide you with comprehensive investment advice. Click on the following link to learn more.

Click here to Optimize your 401k

And, don’t forget to use Partner Code HCM5259 for a 10% discount when you sign up.

 
Union Membership Continues to Dwindle

Labor Market Review

As industry has evolved in the United States over the decades, unions have become less formidable. In the early years of industrialization during the late 1890’s and then leading into the 1930’s and 1940’s, unions provided workers representation where workplace safety and fair wages were difficult for individuals to bargain for on their own.

As the U.S. economy transitioned to less of a manufacturing economy to more of a consumer economy, fewer workers had the need to be represented by a union. When the U.S. Bureau of Labor Statistics first started to gather comparable union data in 1983, there were 17.7 million union workers making up over 20% of the total workforce. At the end of 2016, union membership represented only 10.7% of workers nationwide.

The public sector has the highest level of union workers at over 35%, while the private sector’s workforce is made up of less than 7% union workers. Currently, union membership is about 11% of the total workforce, nearly half what it was in 1983.

Union membership can also vary from state to state, as some states are identified as right to work states with laws that prohibit union security agreements, or agreements between employers and labor unions. South Carolina, a right to work state, has the lowest union membership of any state at 1.6%. New York, which is not a right to work state, currently has the highest union membership at 23.6%.

For the most part, unions have usually been able to secure their members more generous wages and benefits, with the median weekly pay at $1,004 versus $802 for non-union workers as of 2016.

Sources: BLS, Dept. of Labor

 

 

 

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